By Christian Kaiser
In 1995, Clayton M. Christensen, a professor at the Harvard Business School, coined the term and theory “disruptive innovation.” This term has since become so popular in the tech startup world that most entrepreneurs use it in their pitch or when describing their business. The phrase “tech startup” is almost synonymous with disruptive innovation. However, as Prof. Christensen and his coauthors explain in their new article, many people, including top executives, are not using this term correctly and are misidentifying “disruptive” businesses. In his new article, Prof. Christensen explains the necessary conditions of “disruptive innovation” and applies them to Uber and Tesla, ultimately finding that neither is disruptive. In this blog article, I briefly address why it is important for lawyers working with technology to understand the theory of “disruptive innovation.”
Christensen believes the current use of “disruption” is much too broad, that people use it to invoke innovation generally, or, in my experience, use it in the literal sense. This is understandable. Why not use buzzwords in your pitch? “We are disrupting MegaCorp!” (Applause intensifies.) The problem is that simply invoking disruption does not make it so. Companies must meet certain necessary conditions to be truly “disruptive.” Incumbent companies focus on the needs of their largest customer segment, thus ignoring the needs of some and overproviding to others. In order to be “disruptive,” entrants must either (a) originate in the low-end of the incumbent’s market, focusing on the over-served customers of the incumbent and then eventually capturing the incumbent’s mainstream customers when its quality is on par; or (b) create a new market by creating customers where there previously were none.
Christensen concludes that, while immensely successful, Uber is not disruptive, even though it typically describes itself that way. Uber did not originate in either a low-end market foothold, nor did it create a new market. To say that taxi companies overshot the needs of a material segment of customers, thus creating a low-end opportunity, is untenable and thus Uber did not enter at the low-end. Nor did Uber initially target non-taxi users, e.g. people that drove, walked, etc. Uber started in San Francisco, a major city with plenty of taxis, and targeted people who typically hired cars. Christensen claims that Uber has done the reverse of a disruptive model, starting at the mainstream market, and then appealing to overlooked segments later. Uber created, what Christensen calls, a “sustaining innovation,” making a “good product better in the eyes of an incumbent’s existing customers: fifth blade in a razor, clearer TV picture, better mobile phone reception.”
Tesla is also innovative, but it also does not meet the definition of a “disruptive innovator.” It entered close to the top of the automobile market, an area well served by many incumbents, as its cars start at around $70k. Tesla did not create a new market because, depending how you define its market, Tesla was neither the first company to offer a car or an electric car, thus it did not create customers where there previously were none. So, Tesla is clearly not a “disruptive innovator,” but it seems to be more than a “sustaining innovator,” which goes to show that just because a company does not fit in one box does not necessitate that it fits in another.
So, what company exemplifies the “disruptive innovation” model? According to Christensen, Netflix. At launch, Netflix was not appealing to most of Blockbuster’s customers, who rented movies on impulse. Netflix had a large inventory of movies, but shipped them through the mail, initially appealing to online shoppers, movie buffs who didn’t care about new releases, and early-adopters of DVDs. However, eventually Netflix began to serve a much broader market, ultimately driving Blockbuster out of business in 2005. Netflix entered on the low-end and moved up in the market.
Why should lawyers care about what businesses fit the technical definition of “disruptive innovation?” Whether your focus is corporate or intellectual property, understanding your client’s and their competitors’ business models is a must. Furthermore, understanding the risk related to various types of business models is an excellent place for you to add value for your client. Disruptive companies are often ignored by industry giants until it’s too late. Companies that challenge established industry giants right out of the gate are often crushed early on, or face relentless attacks and fierce competition (see Uber). Knowing which one your client is enables you to provide more tailored legal advice and increases your value.